Perhaps we need a "Countdown to parity" diary series chronicling the decline of Sterling relative to the Euro. It currently stands at .89 £ to  or 1.12  to £ as in the graph below. This is down from a high of 1.75  to £ in the early 2000's.

The key reason for the decline now is the collapse of the financial services sector which had become the increasingly dominant sector of the British economy and which has resulted in an overall decline in the size of the British economy in recent months. However massive increases in Government borrowing to fund the bail-out of British banks and to stimulate the British economy are also resulting in an increasing crisis of confidence in the value of the £.

Although the nominal Debt to GDP ratio is c. 40% of GDP, some authorities now estimate the real Debt GDP ratio to be closer to 100% once all the contingent liabilities taken on by the Bank nationalisations are taken into account - the highest figure for over 50 years. Sober analysts like Willem Buiter are warning of a triple financial crisis: a combined banking crisis, sovereign debt crisis and sterling crisis and advocating an immediate move to join the Euro as a means of stabilising the crisis.

But would the current Eurozone countries be wise to agree to such a move without radical structural changes in how the British economy is managed? Would Merkel add a nein to De Gaulle's famous non of 40 years ago?

promoted by afew

First, let me declare an interest in this discussion: Britain is still Ireland's largest trading partner, and so exchange rates risks and costs are still a major factor in Irish economic development - perhaps more so than for any other Eurozone member. The devaluation of Sterling is currently putting huge pressure on the Irish retail trade as shoppers flock in their droves to Northern Ireland to take advantage of the much cheaper Sterling denominated goods.

To be fair, the Irish Government has also not helped their cause by raising VAT rates just as the UK is reducing them. In addition the Irish retail sector - being relatively small and remote from the rest of Europe - has not had the same competitive pressures as mainland Eurozone countries - resulting in Irish prices for food and consumer goods frequently being as much as 30% higher than in the rest of Europe. Global retail chains like Tesco, Aldi, and Lidl routinely charge 30% more for the goods in Ireland - always, of course, citing higher overhead and transport costs - when the reality is that it is lesser competitive pressures which enables them to get away with higher prices.

RELAND IS the fourth dearest place in the world to live and shop, according to an international price comparison survey.

Although prices are falling for many goods, they are not falling as fast as in many other countries, the survey by cost comparison website PriceRunner.co.uk shows.

Ireland was the most expensive of the 23 countries surveyed for condoms and ranked in the top five for other products such as vodka, bus tickets, Coca Cola, takeaway coffee and a Nintendo Wii. Prices for some consumer electronics in Dublin are more than twice those in the US.

Last year's survey ranked Ireland in sixth position, but this year only Norway, Denmark and France were more expensive.

So the devaluation of Sterling cannot be blamed for all of Ireland's economic troubles, but it certainly doesn't help. If the same currency were in use both north and south of the boarder there would be much greater price transparency, it would be difficult for multiples with branches in both markets to justify such differential pricing, and generally it would facilitate the greater integration of the all Ireland economy - something the EU and the internal market is supposed to be all about.

But would it be in the interest of other Eurozone countries to allow Britain to join? Certainly, if you want to compete with the $ as the world reserve currency, there is a certain logic to saying that 'Big is Beautiful' and that adding Britain - and the London financial centre - to the Eurozone will give it more critical mass and help to consolidate its position vis a vis the $. But would the UK joining the Eurozone destabilise it and make its future management more difficult unless there was a concurrent development of common fiscal and economic policies?

The current apparent spat between Merkel and Sarkozy/Brown can also be seen as a fundamentally different philosophy of Government and Government intervention - even in a time of crisis - and such a philosophical difference would likely grow even wider if a more Atlanticist Tory Government were to come to power. The "British solution" appears to be to borrow and inflate its way out of trouble and if this results in a devaluation of Sterling (and an improvement in the relative competitiveness of what remains of British Industry) then what's the problem? It's hard to see any future German Chancellor (or ECB President) being similarly flahouloch with the value of the Euro.

So for all kinds of political, national chauvinistic, and genuine philosophical reasons I don't see the UK joining the Euro any time soon. But that also means we have to live with a wildly fluctuating neighbouring currency. And at the moment it seems that there is only one way that Sterling is going, and that is down. What goes down doesn't always come up again, but it might be interesting to see where the £ to  exchange rate will be in 12 months time: Anyone like to take an (of course very educated) guess?

The Euro was barely mentioned, but there was an intervention by someone from "The City" which I'll report here. He started out with the claim that London is subsidising the rest of the UK through its tax revenues which, as we know (ahem), are due mostly to London's position at the centre of the world's capital markets. He mentioned that the Euro Zone is taking over from the US as a global standard-setter in finance, and that this is driving international banks to establish offices in London, which (see above) is good for the UK economy. So the Euro is good for Britain because of that. But, of course, that doesn't mean that the UK should trade the Pound for the Euro. And here's where I really felt like slapping the guy to wake him up: he said there wouldn't be a case for the UK joining the Euro Zone unless and until there's some serious economic crisis which is not what "the current hiccup" is.

I'm sure that guy still has his job in The City while I have lost mine... There is no justice in the world...

Most economists teach a theoretical framework that has been shown to be fundamentally useless. -- James K. Galbraith

Sorry to hear you lost your job. I presume it was a "last in, first out" situation. I wondered where you'd been. As I have argued elsewhere (with Jerome) being right too early doesn't really help you in (bureaucratic) business. (It can help you as an entrepreneur). Even Obama is appointing Summers rather than Stiglitz. The alacrity with which the neo-libs have become neo-Keynesians also seems to have disconcerted the Germans. Career management is about re-inventing your brand to suit changed circumstances. The most successful are also the most shameless. Principles tend to get in the way. I hope you find something else soon - perhaps start your own consultancy - how about one specialising in "surviving disaster Capitalism"?

They are no more "neo-keynesians" that the Pauslon bailout of friends was "socialism." We are storign up trouble if we let them steal more words while they still do the same as before: pile in debt on all of us to help a few.

Willem Buiter goes through the process and alludes to this. However he sees many of the effective benefits of the Euro applying even during this transitionary phase. Perhaps I should amend the poll to reflect this distinction.

Thanks - be useful to add the code to the new user guide, or better still, to the space around the text/copy boxes on the edit page. I'm a copy and paste man when it comes to code! I was trying to avoid the above the fold graphic/text taking up too much screen space but the HTML requirement doesn't make it easy...

There are too many Little Englanders who'd rather see the pound suffer hyperinflation - which is a reasonably likely outcome of the Brown plan - than see it disappear.

A year from now parity will be a distant curiosity.

Economically the pound should have been eliminated back in the late 90s. It was always a footnote on the NuLab ticklist, because pushing harder for it would have been political suicide.

So 'should' and 'will' are completely different questions. The answer to 'should' is Euro entry is the only thing that can save the UK from double digit inflation and interest rates of 15-20% a year or two from now. I'm sure the two year requirement could be waived at short notice, on the grounds that the UK won't get another chance to show practical interest in joining any time soon.

But 'will' is still beyond a last resort, politically. It would take food riots and martial law before it could be considered seriously in Whitehall - or at least a plausible threat of same.

I'd be impressed if Brown suggested joining ahead of time, but I'm not expecting that happen. The Tories would be even less likely to suggest it, for obvious reasons.

My take on the internal UK politics would be similar, but the Diary is written more from an Irish/Eurozone perspective. Would the Eurozone countries really want to take on the grief of Brits whingeing at ECB polices in the way that they whinge at Brussels now? Hell, even if the Eurozone rescued the UK from an Iceland meltdown (geddit) they would get nothing but grief in return. I suspect Merkel would let the UK stew in its own juice - and as you suggest - the Tories would be more inclined to that POW as well. The real question is whether the City would have the clout to call the shots - especially if London was losing its position as a centre for global capitalism to Frankfurt/Paris.

My suspicion is that the UK will join the Euro far too late, if at all, and that the Germans will not be over eager to accommodate them - as they are not now over eager to adopt the Brown strategy for European recovery. Bottom line - Germany will call the shots.

You may well be right. And it's an interesting POV because the default UK assumption is that of course the EU would accept the UK on demand.

The possibility that there might be loss of face, or strings and conditions, not to mention a certain implicit payback, really isn't on the radar here.

The UK could point out that the City has been convenient for various semi-legal and illegal laundering and tax evasion schemes which have had tacit EU support, so it's not as if the EU is an innocent party. But that might be a little too overt and wouldn't be in the spirit of the game as it's played.

This is worrying because UK as Iceland 2.0 is far from unlikely. We do still have manufacturing and engineering industries of a sort, and Brown has been muttering about green this and that. We also have unexpectedly strong media and broadcast industries, and if it were up to me I'd be pushing the creative industries next to sustainable greenery as a replacement for finance - because we have the talent, but most of it is being wasted or sidelined.

Really we're in a 70s-style transition moment now - from Old Economy to New Economy.

Back then Thatcher and the Friedman Freaks were ideally placed to push through their idea of progress. Currently green tech and creative media are an obvious next step, but neither have the lobbying power nor the so-called intellectual and academic support that finance had at the time, so any transition is likely to be much less smooth and much more dangerous.

Which in turn requires that Eurozone countries have confidence in UK fiscal/economic policies in the first place - which won't happen under current policies - and current policies won't be changed at the behest of the Germans - which means that ERM won't happen short of a post Iceland melt-down rescue package and radical political culture/ policy change.

You could also read the graph since 1995 as representing a dip in the Euro/Deutschmark post German re-unification which has now been corrected - and the longer term Deutschmark/Sterling trend is reasserting itself. Perhaps devaluation has been an ongoing UK strategy since ww2/loss of empire to compensate for ongoing de-industrialisation/loss of competitiveness.

Why change now? There are no structural factors to offset that long-term decline, and some which will accelerate it, at least in the short term.

How so? What's the mechanism by which the UK financial sector could prop up the £/€ exchange rate? And why only from '95 through '08? What happened in the early to middle '90s to offset the devaluation in the previous couple of decades?

I'm not saying It's wrong - I just don't see a clear mechanism (whereas the German reunification explanation comes with a pretty neat story).

One interpretation of the drivers of this persistent overvaluation would be a Dutch disease story, where the role of the natural resource sector in the standard version of the Dutch disease is taking by the UK banking sector. In this interpretation, a long financial industry bubble in the UK has driven up the real exchange rate in the whole economy and crowded out other sectors producing internationally tradable commodities. The recent sharp depreciation of sterling corrects this long-standing anomaly

I get that part: Stoopid Furriners(TM) buy into British Ponzi scams with their own currency, which they then have to convert to £, which drives up the £. But why did that become so dramatically more marked in the mid-90s? The fun and games started in the early 80s with Maggie Thatcher, after all. So why this uptick in exchange rates in the middle of Bliar's first or second term?

I didn't realise that Bliar was quite that recent a phenomenon. He seems to have been there for all of my political life. Not that I paid much attention to him before he started going off on that whole ill-advised Iraq adventure...

Which is all well and fine, but according to the graph, the revaluation of the £ happened in '94-'96 against the D-Mark. So the question appears to remain, even if the name of the British PM has to be swapped to whoever it was before Bliar.

...Driven by stockmarket bonuses, foreign investment buyers (principally from Hong Kong and Singapore) and a shortage of the "right" properties, the capital's heated market is seen, by this faction, as the portent of a Second Coming for a nationwide upturn in house prices - regardless of the election results. (Rival agency Knight Frank recently made the dry comment, that it doesn't see the "widely predicted victory for Labour" having a significant effect on the market because "the economic policies of the Labour party do not appear to be dramatically different to those of the current Government".) "Of course, it's nothing like the Eighties boom," said a Savills Surrey consultant in a silk bow tie. "Ten years ago, it didn't matter if a house was as ugly as sin and sat on a main road, people would buy it at any price. These days, buyers are much more fussy and still very cautious." Let's hope he's right, because signs of the crowd hysteria which underlined the 1988 boom-time peak are beginning to re-emerge.

We could test the German Unification hypothesis by looking at similar time series for £/$ and £/yen exchange rates. If they show a similar picture, then it's probably the £ climbing. If they don't have that kink, it's probably fluctuations in the value of the DM.

My take would be that Sterling has performed similarly against other major currencies with the exception of the Euro from 1999 to 2003 when it significantly over performed against the Euro. Perhaps this reflects anglo scepticism about the prospects for the Euro in its early days - and as Mig says - particularly during the period prior to its formal introduction (Jan 2002) as the cash currency for all participating members. Perhaps its a case of the Euro gradually gaining credibility and traction such thet 90% of UK trade is now transacted in Euros.

After the introduction of the euro, its exchange rate against other currencies fell heavily, especially against the U.S. dollar. From an introduction at US$1.18/, the euro fell to a low of $0.8228/ by 26 October 2000. After the appearance of the coins and notes in 1 January 2002 and the replacement of all national currencies, the euro then began steadily appreciating, and soon regained parity with the U.S. dollar, on 15 July 2002. Since December 2002, the euro has not again fallen below parity with the U.S. dollar but instead began an ascendency. On 23 May 2003, the euro surpassed its initial ($1.18) trading value for the first time. At the end of 2004, it reached $1.3668 (0.7316/$) as the U.S. dollar fell against all major currencies. Against the U.S. dollar, the euro temporarily weakened in 2005, falling to $1.18 (0.85/$) in July 2005, and was stable throughout the third quarter of 2005. In November 2005 the euro again began to rise steadily against the U.S. dollar, hitting one record high after another. On 15 July 2008, the euro rose to an all-time high of $1.5990 (0.6254/$). In a reversal, in August of 2008 the euro began to drop against the U.S. dollar. In just two weeks the euro fell from its peak to $1.48 and by late October it reached a two and a half year low below $1.25.[59] On 12 December 2008, the pound sterling fell to an all-time low of £0.89235 (1.1206/£) against the euro.[60]

If I had to take a stab, I'd call that a sharp devaluation of the £ around '93, followed by a more or less steady climb (with a peak around '97-'99 - what happened there?) until the present crash, overlaid by a period from '99 through '03 where the € was undervalued.

This is certainly compatible with Jerome's diagnosis, and with Migeru's ideas about the relative weakness of the € around the time of its introduction.

The German reunification, OTOH, does not strike me as overwhelmingly obvious in that figure.

As per upthread: the re-start of the housing boom; and also London having its part in the dotcom boom (but even London was left on the sidelines by Wall Street by 1999); both of which meant a flood of foreign capital.

The German reunification, OTOH, does not strike me as overwhelmingly obvious in that figure.

Indeed the DEM never had it so good as in the first few years after Reunification. Reunification might still have a effect if investors 'realised' the economic problems around it with delay. Redstar however will surely point blame at Bundesbank policy in those years.

``The bleak outlook for the economy has led to a lot of disappointment and that's putting pressure on the pound,'' said Lutz Karpowitz, a currency strategist in Frankfurt at Commerzbank AG, Germany's second-biggest lender. ``Whichever way you look at it, there's no good news from the U.K.''

The pound traded as low as 82.38 pence per euro... The pound may depreciate to 84 pence in the next ``couple of weeks,'' Karpowitz said.

...Last Updated: November 12, 2008 03:27 EST

My bolding. It actually weakened that low the same day. In an article later that day, the same quote is included -- I wonder if the editor felt funny or just didn't pay attention:

The pound traded as low as 84.12 pence per euro, the weakest since the single currency's introduction in 1999, and was at 83.82 by 4:27 p.m. in London. It fell to $1.4972, dropping below $1.50 for the first time since June 2002, from $1.5384. The pound may depreciate to 84 pence in the next ``couple of weeks,'' Karpowitz said.

...there is nothing that cannot be explained as a (long overdue) correction of a persistent overvaluation of sterling - a misalignment that has biased the economic playing field against industries, both exporting and import competing, that would have had a fairer crack of the whip at a more reasonable exchange rate.

One interpretation of the drivers of this persistent overvaluation would be a Dutch disease story, where the role of the natural resource sector in the standard version of the Dutch disease is taking by the UK banking sector. In this interpretation, a long financial industry bubble in the UK has driven up the real exchange rate in the whole economy and crowded out other sectors producing internationally tradable commodities. The recent sharp depreciation of sterling corrects this long-standing anomaly.

Although the nominal Debt to GDP ratio is c. 40% of GDP, some authorities now estimate the real Debt GDP ratio to be closer to 100% once all the contingent liabilities taken on by the Bank nationalisations are taken into account - the highest figure for over 50 years.

Yes, well, Alice at UKhousebubble.blogspot. was kind enough to post a graph of UK "external debt" that linked to Spectator.co.uk. The one to the left the other of the pair. I take it "external debt" comprises government bonds ("gilts") as well as corporate bond and securities held by foreign investors. Note that the graph merely describes rates of change rather than absolute value outstanding. Evidently, investors "fled" to UK debt quality over the period. The Spectator's blogger implies a crash in roll-over corporate debt is imminent:

"Narrow it down to short-term debt, ie IOUs that have to be paid back within a year, and the picture grows even bleaker. It adds up to 300% of GDP - six times that of France whose loans are long-term. Saunders says, with some understatement, that this makes "the UK economy and financial system highly vulnerable when, as now, global banking and capital flows dries up." I would suggest that Ireland's miracle industrial growth over the past decade is vulnerable to the similar credit dependencies more so than ForEx ties to the UK.

I didn't find the Saunders source material, but I did discover his opinions are rather ubiquitous, in the manner of Delong and his "good friends" Mankiw and Furman. Saunders appears at silobreaker.com (what an amusing masthead!). He also publishes at MarketWatch. As the Euro-contributor to the January 2007 bulletin, "Benign Outlook Reinforced," (pdf) his analysis betrays his rank in the silo. Consider one top-line: "M3 appears increasingly uncorrelated with GDP in the short- and medium-term, while credit to firms overstates the growth of total liabilities." In his section Saunders clarifies "credit to firms" is a head-line for excessive leverage encouraged by low interest rates, cascading from the ECB setting over all. Which strikes me as odd since ECB resisted despite much press acrimony FRB formulations 2007-2008. Perhaps Saunders was somewhat biased by UK-IR securities marketing and firm-level data. I dare not speculate on that matter. His observation about cumulative corporate debt and "total financing" exceeding capacity is well taken.

I don't see the bank nationalisations as a problem - as long as they're paying their way, they're not a key debt.

More worrying is the long-term PFI fix, which was was always designed to take government borrowing off the official balance sheet, but will have the unfortunate effect of back loading repayments so that various councils and social services become less and less able to afford them.

If the short term debt figures are accurate - and bear in mind the Spectator is a Tory rag - that's quadruple plus ungood.

I would suggest that Ireland's miracle industrial growth over the past decade is vulnerable to the similar credit dependencies more so than ForEx ties to the UK.

Although the Sterling area is our biggest single market, the Eurozone, taken as a whole, is much bigger. I suspect most Irish corporate borrowing is in Euros - interest rates have been low, and why take on exchange risk?

The problem for the Brits is that with so much of their borrowing denominated in $ and , they have to pay back so much more as Sterling depreciates.

Longer term this can be offset by the improved competitiveness of Sterling based companies, but short term it must make their borrowings look pretty scary.

Obligatory reminder about Ireland; it's population is 4m and it's basically one city with an extended hinterland. Analogies to bigger countries are often pretty much vacuous, just like they were when the neo-libs were singing the praises.

Analogies to bigger countries are often pretty much vacuous, just like they were when the neo-libs were singing the praises.

Comparison by total population isn't the point of my comment. The point of my comment is comparison, if any, to structure, or composition, of the labor force and perforce domestic demand for certain skills. The so-called service sector is non-farm and non-manufacturer. Now, the types of occupations that comprise the service sector have varied over time, for example, to exclude "gardeners" but include "landscapers", real estate agents and customer service reps as well as "independent software vendors" (ISVs). In any case and as a matter of asset production, such employment classes are not coupled to durable assets and are historically speaking extremely vulnerable to substitution effects, ergo unemployment and prevailing (non-unionized) wage competition, in both B2B supply chains and consumer DI markets.

Now, the welfare costs, if any, to the state is a function of the size and composition of the labor force. Of course, the cost would be greater in the US than in Ireland simply because of the population differential. So that is an uninteresting observation.

The truly interesting hypothesis of cost and unemployment rates depend on composition characteristics.

Well put. Ireland still has significant though relatively diminishing agricultural and industrial sectors and is well represented in ICT and pharma. Like everyone else we have been attempting to go up the food chain into Finance, R&D, Branding, tax avoidance etc. with some success, but the resilience of all these sectors is now going to be severely tested.

In fact Ireland is the most exposed EU country of all, and what is coming there will test the Euro to destruction, I think.

Unlike the UK, where housing values are underpinned by a shortage of building land, Ireland has a huge oversupply of newly developed property, developments in progress, and overpriced "banked" land zoned for building.

Irish land prices have collapsed - and the decline has been accelerating, I was told. Virtually all Irish banks - but the "Builders Bank" Allied Irish in particular - are sitting on time bombs.

Commuter towns such as Naas, Arklow and Navan are likely to be hit hardest and the people who will lose their jobs and, eventually, their homes are the very ones who bought into the boom most. They are the young working families, largely employed in white-collar jobs, who believed the hype and bought the new houses, complete with decking and barbeques, close to the top of the market. They are the Decklanders and Ireland is about to endure the great "Deckland Depression".

A few years ago, it was all so different. Deckland, that vast expanse of new suburbs, which emerged in the past 10 years, was the most optimistic place in the country. It was young, energetic and despite the snobbishness of many commentators who believed that these new towns were soulless, Deckland was as vibrant and community-focused as any new suburb has ever been. If you dispute this contention, look at the growth of community organisations like the GAA or new school rolls in the commuter counties. Deckland was Ireland's "Babybelt"; and for many thousands of people, Deckland represented a New Ireland, where people could settle, own their own houses and begin the great Irish process of trading up. Deckland embodied the essence of the New Irish Dream, where the population was on an upwardly mobile conveyor belt, propelled by the twin forces of easy credit and rising house prices. Everyone could be a winner.

Now all that is shattered and the dream is over. Unemployment is rising fastest in these areas, house prices are falling quickest and a recent survey indicated that the most insecure part of the workforce are young, heavily committed white collar workers.

"The future is already here -- it's just not very evenly distributed"
William Gibson

Ireland is the most exposed EU country of all, and what is coming there will test the Euro to destruction

Ireland has, fortunately, a small enough GDP that a government guarantee of 2-3 times GDP is has been put in place is only about 5% of the Eurozone's GDP. Ireland may become a wholly owned subsidiary of the European Central Bank, but it won't take the Euro down with it.

However, the days where the EU could have a monetary union and no EU-wide fiscal or industrial policy are likely over.

Most economists teach a theoretical framework that has been shown to be fundamentally useless. -- James K. Galbraith

P.S. To answer CoffeeHousers' query, this is "external debt" by the IMF definition, which is gross. (And does not include contingent liability, just debt). One must take into account that Britain is likely to have proportionately greater net assets whose value would be amplified by sterling's plunge. But how much greater? I'll keep hunting. Every crisis is different, and each has its own metrics. It was our concentration on the metrics of the last crisis (inflation) that blinded so many to the causes of this crisis (debt).

The key issue is the value of the assets Britain can set against its 400% of GDP external debt mountain. If those assets are in quality profitable companies, then fine. If they are in derivatives, dodgy mortgages and other asset bubbles and Ponzi schemes, then you are looking at a massive default.

If they are in derivatives, dodgy mortgages and other asset bubbles and Ponzi schemes, then you are looking at a massive default.

As always the bottom line is income. Repayment is dependent on income, irrespective of sources. Of course, many of us are watching in wonder as central bankers connive QoQ by ForEx and mineral reserves to "ease" the obligations of their most favored clientele.

Fraser Nelson is trying to scare us by pointing out that the UK's external debt is equivalent to 400% of our GDP.Actually, on the most obvious measure, he understates the true amount. National Statistics say our external liabilities were £6.7 trillion in Q2 - 461% of our annualized GDP. (Tables D and K of this pdf).What he doesn't say is that our overseas assets are also big. They`re £6.4 trillion. So our net overseas liabilities are just £309.4bn, 21.2% of annualized GDP. This is largely a reflection of the fact that we've been running small current account deficits for ages.

I was at first surprised to find Sweden at number 15 as the public debt has been mortgaged quite a bit since it skyrocketed during the 90ies crisis. Seeing Norway with its oil wealth at number 18 was also a bit curios.

"External debt" is defined as the total public and private debt owed to nonresidents repayable in foreign currency, goods, or services

Small countries has more international trade per capita, as borders are passed more often. Trade yields debt, and if trade is equal then debt is equally on both sides of the border, giving both countries more external (as opposed to internal) debt. A country can be on the top of the external debt list and have no problems at all if it has assets to cover every one of those debts on a moments notice.

... would be the balances on short term and long term external debt payable in foreign currency. Those are the values that can explode in domestic currency terms during a FXR melt-down, as many SE Asian nations discovered in the 90's.

The earlier finger-pointing underscored the fault lines in Europe between those such as Mr Brown who believe in spending their way out of the downturn, and others such as Mr Steinbrück who are resisting calls to increase borrowing. The attack by Mr Steinbrück - from the left-wing Social Democratic Party, which is in coalition with Ms Merkel's Christian Democrats (CDU) - delighted British Conservatives. In an interview in Newsweek magazine he ridiculed the British Government's recovery plan, in particular the cut in VAT from 17.5 per cent to 15 per cent.

"We have no idea how much of that stores will pass on to customers. Are you really going to buy a DVD player because it now costs £39.10 instead of £39.90?" Mr Steinbrück said.

"All this will do is raise Britain's debt to a level that will take a whole generation to work off. The same people who would never touch deficit spending are now tossing around billions. The switch from decades of supply-side politics all the way to a crass Keynesianism is breathtaking."

"All this will do is raise Britain's debt to a level that will take a whole generation to work off. The same people who would never touch deficit spending are now tossing around billions. The switch from decades of supply-side politics all the way to a crass Keynesianism is breathtaking."

Thus spake Steinbrück!

Independent assessment of the UK government's total budget (not just the VAT decline) by the IFS (no friends of the Labour party, I would note):

If Germany has so much more public debt, why is the UK crying, Germany should follow Browns policy?

Actually there are good reasons.

Trajectory counts. This 64.90% are only slightly more than 1998. In the last two years, this number was going down, while Britain was already running a high deficit on which Brown is now adding.

It is very credible that this high indebtness is a one off issue for Germany. Kohl was running a pretty conservative fiscal policy in the eighties. The unification was extremely expensive and made it necessary to adjust the revenue and the state's spending. For several reasons this took a very long time. There is no similar huge project in sight.

The Euro is pretty much reserve currency. Germany is likely paying lower and more stable interest in the long run and can therefore bear higher indebtness.

The private sector in the UK is in a much more dire situation than in Germany. Before the German state goes bankrupt, it will tap the private wealth. Brown's policy is doing the inverse, it increases gov't debt for making the private sector wealthier.

This does absolutely not bode well for the repayment of my French student loan!

Maybe I should ask for a student loan bail-out!
Maybe I should move back to France and quit my first job in Canary Wharf, east London:( . The honeymoon would have lasted for not so long...Have any of you ever been there? (Canary Wharf I mean)
It looks like an island with arguably imposing buildings that host big financial institutions (such as defunct Lehman Brothers').
What is funny is that the whole place is surrounded by a (very) poor neighbourhood. It is almost iconic to me, reminiscent of some futuristic comics...

Never had the (dubious) pleasure of being there... The fact you still have a job there is impressive enough. Perhaps they will redevelop some of the impressive buildings into apartments for the poorer neighbours?

You don't seem to have got the message that the stimulus package is for the rich, not the poor. The poor need to have an incentive to work, so you can't give them any handouts...

Well I just started off as a graduate so I believe they're better off laying off people who weight more on their payroll.

The temporary VAT cut is LUDICROUS! And I realised that in the UK the City (and its extension,i.e. Canary Wharf) dictates the rules...

The other day, I was talking to my friends from University and asking them why the people here liked living (way) above their means so much?
The reason they put forward was cheap credit and its relatively easy obtention thereof.
It's almost as if they believed all those seemingly tempting credit card / cheap loan deals can make you into a millionaire!
I really don't want to concede that Brits are so gullible as to accept ever more debt. I think it's more of a sociological ill in the end.
Inevitably, people will have to become more reasonable...

I'm being way too analytical anyway; I should remember that the markets are very shaky at the moment and I could be whisked off at any time:)
So I should just enjoy everyday as my last, save as much money as possible (in "falling GDP" haha), and well... wish you all a happy weekend!

The Government would win a referendum on the euro if it came out in favour of British membership of the single currency, an influential poll showed yesterday.

The Government would win a referendum on the euro if it came out in favour of British membership of the single currency, an influential poll showed yesterday.

Britons would vote narrowly to abolish the pound provided the Government said its tests for the euro were met and the country's leaders campaigned in favour of joining.

An NOP poll for the investment bank Barclays Capital found that under those conditions, 40 per cent would support UK membership of the euro, and 39 per cent would vote against.

Barclays said it was the first time an independent UK survey had found a majority in favour of the euro. Opposition to entry without government backing also softened. A net balance of 27 per cent would oppose joining, compared with 31 per cent last month.

"It is very clear from our research that there has been a major shift in attitudes towards the euro in the last few months," David Hillier, Barclays Capital's chief UK economist, said.

The poll triggered a fresh row between the lobby groups on either side of the euro debate. Britain In Europe said the launch of euro notes and coins had reduced opposition. The No Campaign said it was always possible to get a "funny result" from a hypothetical question. "The public are two to one against, despite distorted media coverage of the euro launch being a success," a spokesman said.

Patricia Hewitt, Secretary of State for Trade and Industry, became the latest cabinet minister to back the euro. In a speech on the manufacturing industry, she said the pound's exchange rate against the euro was "causing difficulties" for British firms.

"The potential benefits of euro membership in terms of trade, transparency, costs and currency stability lead us to support it in principle," she said.

And just last September the LibDems dropped their longstanding Euro accession plank from their European election platform. And this is after having advocated a referendum on EU membership rather than on the Lisbon Treaty on the argument that the British electorate would actually vote for EU membership if given the choice to stay or quit (rather than having a referendum on Lisbon interpreted as a referendum on membership).

Most economists teach a theoretical framework that has been shown to be fundamentally useless. -- James K. Galbraith

Weell, not all ET'ers' opinions are created equal. If all the actual economists say 1.3 and only n00bs like myself say parity or below-parity, then the poll might not say all that much...

For myself, I just pretty much took a shot in the dark saying that the UK is monumentally screwed, but the rest of the Union will cut a deal to keep it in the ERM at roughly around parity - in exchange for a boatload of concessions on other points.

I would say that if the ability of economists to predict and understand the economy is taken into account, then noobs vs econs opinions is not a good predictor of quality of opinion.

Even on ET: Shall we do a countdown of oil prices? Even the decoupling theory is still a bit under the "to be seen" category (although in the short term watching the UK is surely to be "fun" and to go as expected).

Before the inbred elites who have dominated England allow the pound to become extinct and join the euro; the elites will give serious thought to becoming the defacto 51st state of the US. Especially when the Americans are far superior in graft and bribery than their European counterparts in what will become a 'seduction' of the British to give up the pound except as ceremonial currency for the masses.

If the British are forced to choose; it very well may be the US even with the systemic problems it faces.

I do not believe Britain with 'The City' in ruins and an almost non existent exporting manufacturing sector can survive without either using a wealth tax on the elites (never happen), becoming extremely attractive to outside investors as a sort of 'multi Monaco' due to the civility and educated class of Londoners in addition to the combination of devalued currency and assets or finally making a deal to be the 51st state except in name and ceremony.

Which of course raises the question of whether the US wants them... and can afford them. But certainly, it's an - ah - interesting idea... Would be a pain in the neck for the Union in the long term too, to have an American colony right on our Western border...

The pound slumped to fresh lows against the euro today as the two currencies edged closer to parity.

At its low, £1 bought just £1.1102 euros -- its latest in a series of record plunges against the single European currency in recent days.

Some holidaymakers travelling to Europe from Britain are reportedly already receiving less than one euro for their pound at bureaux de change, where commission is charged.

Sterling has dropped around 13 per cent against the euro in the past two months as the Bank of England has slashed interest rates in its attempt to stave off a deep and prolonged recession.

UK rates have dropped to 2 per cent, below those in the eurozone after a 1.5 per cent cut in November and a 1 per cent cut earlier this month, which has compounded the pound's woes.

The weaker currency could provide a boost to UK exporters but the economic woes of major export markets such as the US and Europe is hitting demand.

It is thought short-selling -- where investors sell assets such as shares or currencies in the hope of buying them back later at a lower price and pocketing the difference -- is also behind the pound's slide.